Market Place; Silver Screen's Tie With Disney

By Geraldine Fabrikant

Published: September 11, 1990

Even so, Silver Screen's results have been mixed - a reflection of the high risk of investing in the film business. Silver Screen III, which began financing films in January 1987, has had an 18 percent internal rate of return, generally considered quite good by industry standards, said Keith Allaire, who follows partnerships for the Stanger Group, a New Jersey-based research firm. An earlier partnership, Silver Screen Partners II, started in January 1985, has had a satisfactory return of 13 percent. But the initial Silver Screen partnership that financed Home Box Office films was a flop with investors.

By and large, investors in Silver Screen partnerships have done well partly because of the way these investments are structured. These partnerships put up all the money for the production costs of a picture. And they recoup their investment from ''gross'' dollars from all markets - theater, video and television rights. In Hollywood, that means that investors get their return before the studio can recoup any of its costs. For investors, this type of a transaction is preferred because it guarantees some return even if the film is a disaster and protects them from the cost overruns that often accompany film-making and from the counting of unrelated expenses into the cost of a film by studios.

This also protects the investors from the practice of ''cross collateralization,'' the Hollywood term for using profits from one film to offset losses from others. Since most films lose money, cross collateralization makes movie partnerships potentially risky. For instance, profits from Silver Screen Partners III's two biggest hits - ''Cocktail'' and ''Three Men and a Baby'' - could not be used to offset any losses from less popular titles like ''Benji the Hunted,'' Adventures in Babysitting,'' ''Can't Buy me Love'' and ''Ernest Saves Christmas.''

Investors in these partnerships are also guaranteed their principal five years after a film's initial theatrical release, which protects them from losing all of their investment. Some analysts have compared the recent Silver Screen deals to bond financings. Mr. Betts argues that these deals are somewhat more secure because some ''junk bonds'' have recently gone bad, whereas an investor is guaranteed money back in Silver Screen. Investors who put up $1,000 in 1985 for Silver Screen II, which included hits like ''Down and Out in Beverly Hills'' and ''Stakeout'' but also ''Return to Oz,'' have recouped $977. Mr. Allaire calculated the 13 percent rate by including as yet unpaid fees from the sales of the films in secondary markets like pay television.

Certainly the worst of the partnerships was the first. Investors, who put up $82 million in 1983, have recouped about $58 million to date, or 70 percent of their money. Mr. Betts explained that the same investment approach was used for those films. But since HBO was just starting a film division, he said, its release schedule was slow. ''The last film was released in the spring on 1986, so the payment will be made in the spring of 1991, eight years after investors put up their money,'' Mr. Betts said, adding that the release schedule for Disney is faster.

Silver Screen III is the best of the group, so far. The investors who put up a total of $300 million could do even slightly better than the projected 18 percent because some key films like '''Honey I Shrunk the Kids'' have not yet been licensed to pay television.

An investor in Disney stock in 1987, when Silver Screen III raised $300 million, would have made more money in the stock than in the partnership, said Jeffrey Logdson, a media analyst at Seidler Amdec in Los Angeles. An investor could have used the $1,000 to buy 23 shares of Disney stock in January 1987, when the shares were selling for $43. Mr. Logdson said. Yesterday, Disney's shares were down $2.125, to $99.75 on the New York Stock Exchange, making the 23 shares purchased in 1987 worth 2,294.25.

Even if Silver Screen is a good deal, there is some chance that Disney will not use it for more financing. A company spokesman said Disney was investigating other options. And he did not deny that Disney was talking to Japanese investors.